20% - Assa Abloy

ASSA ABLOY
Annual Report 2007
70
Note 1 cont.
Inventories
Inventories are valued in accordance with the ‘first in, first
out’ principle at the lower of cost and net realizable value
at year-end. Deductions are made for internal profits arising
from deliveries between Group companies. Work in
progress and finished goods include both direct costs
incurred and a fair allocation of indirect manufacturing
costs.
Accounts receivable
Accounts receivable are reported at their fair value, which
corresponds to amortized cost less any provision for bad
debts. A provision is recognized when it is probable that
the recorded amounts will not flow to the Group. The
year’s change in such a provision is reported in the income
statement.
Financial instruments
Financial instruments are initially recorded at fair value.
Subsequent measurement of financial instruments
depends on the classification at initial recognition, which
in turn depends on the original purpose of acquiring the
instrument. Financial instruments are divided into the following
categories:
‘Financial instruments at fair value through profit and
loss’ are financial assets held for trading, financial assets at
fair value through profit and loss (classified at inception)
and derivatives that are not part of a hedge relationship
qualifying for hedge accounting. Gains and losses arising
from changes in the fair value of financial instruments at
fair value through profit and loss are included in the
income statement in the period in which they arise. The
category includes current financial investments and derivatives
that are not part of hedge relationships qualifying for
hedge accounting. See also the section below regarding
hedge accounting.
‘Loans and other receivables’ are non-derivative financial
assets, with fixed or determinable payments, which are
not traded on an active market. Such a receivable usually
arises when the Group provides a counterparty with cash
or supplies a customer with goods or services without
intention of trading the receivable. Loans and other receivables
are carried at amortized cost using the effective interest
method. The category covers non-current receivables,
accounts receivable and other current receivables.
‘Available-for-sale financial assets’ includes non-derivative
financial assets that are either classified as available for
sale or are not classified in any of the other categories of
financial assets. The Group normally holds a limited
number of positions falling into this category.
‘Financial liabilities at amortized cost’ are financial liabilities
which are neither recorded at fair value through profit
and loss nor included in a hedge relationship qualifying for
hedge accounting. Such financial liabilities are reported at
amortized cost using the effective interest method. The
category covers non-current and current loan liabilities
which are not hedged items, other non-current and current
liabilities, and accounts payable.
Acquisitions and disposals of financial instruments are
recognized on trade-date, i.e. when the Group is committed
to the purchase or sale. Transaction costs are included
initially in the fair value of all financial instruments apart
from those reported at fair value through profit and loss.
The fair value of a quoted financial instrument is based
on the bid price on the closing day. Regarding financial
instruments in a non-active market and for unlisted securities,
fair value is determined by using an appropriate method
of valuation, for example using available information on
comparable arm’s length transactions, comparison with
similar instruments, and analysis of discounted cash flows.
The current and non-current distinction is applied consistently
to all financial instruments. When settlement or
disposal is expected to occur more than 12 months after
closing day, a financial asset is reported as a non-current
asset. Thus, when settlement or disposal is expected to
occur within 12 months of closing day, financial assets are
reported as current assets.
Financial liabilities with maturity later than 12 months
after closing day are reported as non-current liabilities and
those with maturity within 12 months of closing day as current
liabilities.
A financial asset is derecognized when the right to
receive cash flow from the asset expires or is transferred to
another party because all risks and rewards associated with
the asset have been transferred to that party. A financial liability
is derecognized when the obligation is discharged or
cancelled or when it expires.
Hedge accounting
Hedge accounting is applied only to transactions that are
designated to hedge a specific risk and that qualify for
hedge accounting. The Group holds a limited number of
such hedge relationships.
A financial liability is a hedged item when it is included
in a hedge relationship qualifying for hedge accounting,
thus effectively hedged by a derivative designated as a
hedging instrument. The liability (the hedged item) as well
as the derivative (the hedging instrument) is recognized at
fair value.
Changes in the fair value of a liability which is the
hedged item of a qualifying fair value hedge are reported in
the income statement in the period in which they arise.
Gain or loss from revaluation of the hedging instrument of
such a qualifying fair value hedge is reported in the income
statement at the same time as gain or loss from the hedged
item.
Gain or loss from revaluation of a hedging instrument
of a cash-flow hedge qualifying for hedge accounting is
reported in equity in the period in which it arises and is
transferred to the income statement in the period that the
hedged cash flow is recognized. Ineffective portion of the
gain or loss is reported in the income statement in the
period in which it arises.
Provisions
Provisions are recognized when the Group has a legal or
constructive obligation resulting from past events and it is
probable that an outflow of resources will be required to
settle the obligation and that a reliable estimate can be
made of the amount. Provisions are reported at a value representing
the probable outflow of resources that will be
needed to settle the obligation. The amount of a provision
is discounted to present value where the effect of time
value of money is material.
Employee benefits
Both defined contribution and defined benefit pension
plans exist in the Group. Comprehensive defined benefit
plans are found chiefly in the USA, the UK and Germany.
Post-employment medical benefits also exist, mainly in the